Why Cash Is the Most Expensive Way to Motivate Your Team
It turns out there is a better way.
One of the big issues every leader deals with on a daily basis is finding ways to motivate their people. It's often a question of what incentives they can employ to get people to engage and perform to their optimum levels.
The default approach has long been to use cash through something like a bonus to motivate people. This approach tends to work really well with certain kinds of employees, especially sales people, who, as I have written about before, tend to be coin operated and more money-motivated than other employees. And that's OK.
But research now tells us that money is the most expensive way to motivate your team--in other words, it's not the most effective way to do that. Rather, it can be more powerful to offer items and experiences instead of cash.
What researchers have found is that it takes an 8 percent increase in base compensation to motivate someone to change their behavior. Paying anything less than 8 percent has proven to be ineffective, and while you could pay more, like a 10 percent bonus, you won't get a marginally greater return in effort than with the 8 percent, which is something of a magic number. That means if someone makes an annual salary of $50,000, they would need to be paid an additional $4,000 to get them to reach for a stretch goal, embrace selling a new high-margin product, or make a certain number of phone calls.
What's interesting, though, is that the same research shows that you get that same performance increase in people by awarding them items and experiences that cost far less--even half as much--as that 8 percent cash bonus. In fact, the research says 4 percent of salary in items is enough to motivate a change in behavior.
For example, I had one CEO client who was looking for a way to motivate a sales team to hit a certain goal in advance of selling the company. This goal was worth millions to the owners. As a reward for hitting the target, the CEO promised that each member of the sales team would receive a Rolex watch as a reward. It was incredible how motivating that was, as the team knocked it out of the park to reach the goal. That CEO handed out almost 100 Rolexes as a result. What's interesting is that a Rolex watch cost about $5,000 at the time--which actually worked out to about a 4 percent bonus based on the average salary of the team. In other words, he got an incredible behavior change for half of what it would have cost him if he had paid the bonus in cash.
It can also be very effective, especially with small teams, to offer customized rewards as a motivational tool. One client I worked with, for instance, knew that one of his employees was a huge Alabama football fan. So, to motivate him to hit a stretch goal, he offered to send him to an Alabama home game, all expenses paid--including airfare, a premium seat, hotel, and food for the weekend. You cannot believe how excited this employee was about hitting his goals so he could get that trip.
What's interesting is that this employee could have afforded to do this trip on his own; he was well paid. But the idea that his company would do this for him was incredibly motivating to him--even though it actually cost even far less than the equivalent of a 4 percent cash bonus.
Yet another example of how custom experiences can be extremely powerful in creating behavior change was when another CEO client of mine rewarded a team of employees for hitting a goal by organizing a Breakfast at Tiffany's event based on the famous Audrey Hepburn movie. The CEO got the store to open just for them and had a catered breakfast brought in. He then gave every member of the team $1,500 to spend inside the store. The team had the time of their lives and were so thankful that their company provided them with such a special experience. They still talk about that one, even years later. While it ended up being a big bill for the CEO to pay, it also totaled far less than if he had paid out a 4 percent cash bonus to his team.
So, when it comes to finding ways to motivate your team and create behavior change, look beyond the easy answer of handing out cash. Think instead of the kinds of customized items and experiences that will not only motivate your team, but also have less of an impact on your bank account.